KB Homes’ shifting foundation for executive pay

It seems like just a few months ago that the chief executive of KB Homes resigned in disgrace amid a burgeoning investigation into backdating of options. Oh wait, it was.

Now, David Phillips at 10Q Detective dissects the employment agreement that KB signed with new CEO Jeffrey Mezger and finds it contains some curious clauses. There’s all the usual blather about linking pay to shareholder performance, but when a company’s stock falls 6 percent since he took office and the outlook is dismal, what’s a CEO to do?

Fortunately, KB has the answer, as Phillips describes:

Since earnings visibility has dimmed–not too mention ROE–Mr. Mezger employment agreement permits the Compensation Committee to consider other factors, like “customer satisfaction and backlog,” when deciding how much to pay him in an under-performing year!

Customer satisfaction? Wow, it seems just a couple of years ago that KB paid a $2 million civil penalty over its use of binding arbitration in home warranties. Oh, wait, it was. And it seems like it was also just a couple of years ago that its mortgage division paid $3.2 million to settle mortgage violation claims by the Department of Housing and Urban Development. Oh wait, it was.

Phillips continues:

Another example where a CEO is held accountable to [no] one, save himself and friends on the board, and where egregious compensation can be arbitrarily received–even when (possibly) not ‘earned.’

If Mr. Mezger resigns for ‘personal reasons,’ he will be entitled to receive $2.0 million in aggregate salary plus 200% of his average annual bonus for the prior three years, or about $5.0 million (excluding value of vesting options).

No reference in the Proxy Statement, as to how much money the Board will grant to him for the 2007 fiscal year for financial planning and tax preparation services, automobile and gasoline allowance, tickets to sporting events, personal gifts, personal meal and lodging expenses, club membership fees, and personal use of Company-owned aircraft.

It’s as if Phillips believes that KB might be the sort of company that in previous years overloaded its CEO with one of the most generous pay packages in the land. Oh wait, it was.

4 Responses

Not to worry about these niggling financial matters at KB. With Martha Stewart designing homes for them all of that will be forgotten as quickly as you can say cheese blintz.

Seriously though with all that seems to go on behind the scenes at the various home builders. Witness Bob Perry of Perry Homes with his top of the charts campaign contributions to anyone he can think of who might make decisions affecting the profitability of his company and these KB homes activities what is a home buyer who wants to give their housing money to an upstanding company to do? Are there any really clean and above board companies building homes these days?

KB and others are building ridiculous numbers of cheap housing, neighborhoods full of 6 cookie-cutter plans that all look the same with ugly fake-wood siding and artificially-colored bricks. Foreclosures are up with the boom of subprime loans and residents who can’t afford their payments (or get trapped in ARM rate hikes) and ultimately neglect the property.

Stewart may have a good eye for design but unless the customer is willing to pay tens of thousands above the base price of their home, it’s still going to look like it came out of the bargain bin at K-Mart.

“what is a home buyer who wants to give their housing money to an upstanding company to do?” -craig

Just don’t. There are so many beautiful well-built older homes out there, buy one of those.

Thanks for the advice Chris about buying an “older home”. The problem is most of those, at least the “more affordable ones”, were originally built by one of the “big builders”. It truly is hard to get away from funneling money into their company coffers either directly by buying new or indirectly by adding to the demand for the used homes they once built.

Just wonderful. Another CEO out only for himself and another Board just rubber stamping it. How many of the ordinary workers have their bonus’ based on “customer satisfaction?” Why not be honest and have the big shot CEO’s bonus based on “what he wants.” And, oh yeah, let’s get rid of Sarbanes-Oxley because corporations and “the free marketplace” will self-regulate. Ha Ha Ha. Unfortunately, the joke is on us citizens.